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Why do smart firms make sub-optimal investment decisions?

I was recently talking to a client whose firm had grown both inorganically (acquisitions) and organically at a rapid pace in the last 3 decades. They grew from being a regional player in US North East to a super-regional player across North-East, Mid-West and Mid-Atlantic. However their future growth aspirations have been limited by a lack of investment in operational capabilities. The client's current state challenge and future state aspiration has led them to consider a set of strategic options to improve their operations capability. The client asked Infosys to help with a strategic options analysis and business case development to secure internal budgetary/investment approval for the optimal choice. They are embarking on their FY13 budgetary process and need to assess the options and earmark a capital budget.

I was recently talking to a client whose firm had grown both inorganically (acquisitions) and organically at a rapid pace in the last 3 decades. They grew from being a regional player in US North East to a super-regional player across North-East, Mid-West and Mid-Atlantic. However their future growth aspirations have been limited by a lack of investment in operational capabilities. The client's current state challenge and future state aspiration has led them to consider a set of strategic options to improve their operations capability. The client asked Infosys to help with a strategic options analysis and business case development to secure internal budgetary/investment approval for the optimal choice. They are embarking on their FY13 budgetary process and need to assess the options and earmark a capital budget.

Having helped clients with similar situations before, I have seen that there is a strong tendency for making such decisions based on the wrong set of criteria or insufficient set of factors. The loudest stakeholders get their favorite options by focusing only on the criteria that are favorable for that option. Not having an objective set of criteria and not following a structured decision framework that weighs the different options objectively against the most important factors to meet its business objectives, leaves firms making sub-optimal decisions. Not explicitly agreeing on a decision framework and a process has been a major reason for lack of buy-in and dis-agreement on the decision, leading to revisiting of the decision.

When I have helped and facilitated clients make decisions such as this, I have seen that agreeing on a structured process to make the decision (using a decision framework) with the stakeholders leads to stronger buy-in with the decision outcome itself. The key for such a Decision Framework is that the strategic options analysis should be multidimensional, have a step-wise approach, balance different criteria, help focus on the most important factors and ultimately compare the alternatives on the Business Value it would create for the firm. By Business Value I mean both the tangible and intangible value that the shareholders, colleagues and community stand to gain "net" from the option balancing it against factors such as cost, risk etc. I look forward to your comments and inputs on this topic.